How to Break Even, Even in Your Worst Month
What is your break-even sales number? Have you calculated it recently?
Why should you know this number? That may be self-evident, but I have always been surprised by how many business owners either do not readily know it or have an incorrect number in mind.
I have always felt it critical to keep constant track of my company’s sales break-even number. The strategy is to build your cost structure so that you can at least “break even” in the projected lowest sales month of the year. Then, when your sales are above that number, a lot of good things happen if you keep the company’s fixed-cost structure at that target level.
We’ve found that sales levels now seem to vary more from month to month than in past years. This makes planning more difficult, especially for staffing purposes. When one of those “big months” occurs, it is necessary to add part-time help or work overtime to get the work out on time. Dealing with peaks in this way is not an easy task, but it is much better than being over-staffed, which results in constant poor financial results.
A quick and easy formula for calculating your sales break-even number is:
Fixed Costs $
divided by 1.00
minus variable cost %
Example: fixed costs = $500,000 and variable cost % = 40%
divided by .60
= $833,333 (break-even sales level)
For this example, I assumed fixed costs to be everything except the cost of goods/materials and sales commissions. Basically, anything that moves up and down with sales levels.
One could argue that production labor/staff costs are also variable, but this is a simplified example and still works well. Using numbers from the previous year’s income statement, or the most recent three or more months of year-to-date data, will suffice for this purpose to reach a monthly average. You can refine this model to fit your own situation, but keeping it simple can make it easier to get a good perspective on the number you need to hit each month.
As business owners, we tend to be overly optimistic when building our cost structure. We end up with fixed costs that are built to cover our “average” or even “highest” sales months. In my view and experience, this is not the best way to make money.
Instead, build your fixed cost structure around your “lowest” or “worst” projected month, and you will find it easier to be profitable and be one of the profit leaders in the industry.